In this week’s #ExpertView, Chief Kerfuffler & Founder, Simon Whale and Commercial & Strategic Director, Richard Durrant, discuss some interesting calculations that give food for thought about your sales and lettings split.
Having worked in the industry for over 20 years, I am still baffled by the bias towards sales that continues to exist in many estate agency businesses. Even with the knowledge we have that a managed portfolio creates the bulk of the value of our businesses at the point of exit, as well as the awareness that when the market drops (Covid-19) property management generates recurring revenue which could be the difference between success and failure.
A quick glance on the web tells me that there are 22,000 sales branches on Rightmove but less than 16,000 lettings branches. Therefore 27% (or 6,000 estate agents) that have been successful and set up their agency, who have a brand, an office, a database, staff and marketing spend seemingly still don’t offer lettings.
Now I could be doing these 6,000 estate agencies a misjudgement – it could be that these agencies do offer lettings and property management services within their ‘estate agency’ brand but like a potential customer does, I’m browsing the biggest online portal and that information isn’t instantly obvious to me so I’m assuming they don’t offer those services.
But I digress, back to lifetime value of sales customer versus lettings.
Lifetime value of a sales customer
The average property price in the UK is £231,185 (Land registration data January 2020), the average fee charged, exclusive of VAT, is 1.3% and, according to research conducted by Zoopla in 2017, the average homeowner moves every 23 years. The mortgage advice bureau suggests the average commission for a mortgage sign-up is £300 and Kerfuffle research suggests that the average commission for a conveyancing referral is £165.
For the purpose of this calculation, let’s presume that we do such a great job with the homebuyer that we get complete vendor loyalty, and they instruct us on the three sales during their lifetime. We are also going to presume it’s a perfect sale and we get buyer and seller conveyancing referrals, with the added benefit that they both have an associated sale/purchase, meaning four referral fees each sale. And finally, in every case, we get buyer and seller mortgage sign up.
So, we have three sets of exchange commission totalling £9,016, twelve lots of conveyancing referral fees totalling £1,980 and £1,800 in Financial Services commission. This comes to a grand total of £12,796. If we now use the basic metric that we exchange on 65% of our instructions, the lifetime value of a sales instruction is £8,317.
Lifetime value of a lettings instruction
According to the 2018 English Private Landlord Survey (EPLS) commissioned by the Ministry of Housing, Communities and Local Government in 2018, the average time a landlord let their property was 11.5 years.
The average monthly rent in the UK is £959, the average tenancy is 20 months and I believe the average management fee is 13%. Therefore, managed fees alone suggest that the average instruction is worth £17,204 (this is not considering the additional income you make on each tenancy averaging 6.9 tenancies over the lifespan). These will include landlord set-up fee, renewal fees, deposit protection income, contractor clips, rent protection policy income, utilities referrals, etc. The list goes on. I would hazard a guess that the ‘extras’ amount to an additional £450 per tenancy. Throw in four re-mortgages for the landlord over the course of the 11.5 years and you are up to £21,509.
As we are making our presumptions on the perfect scenario, it’s fair to assume that after an 11.5 year relationship, you could be confident in getting the sales instruction. So, using the numbers as per the sales workings, we can add £2,772 (taking into account 65% exchange ratio) which takes the grand total to £24,281. Whilst I have no set figures, I am confident that we let/move in 80% of our lettings instructions which means the value of a lettings instruction is £19,424.
This is ignoring the fact that 38% of landlords own between two and four properties and 17% of landlords own five or more properties. Therefore, simple maths suggests that you have a 55% chance of your landlord owning more than one property which comes with zero cost of acquisition (COA).
How is your business split?
Just take a moment to consider how you distribute spend between sales and lettings. I don’t just mean marketing spend; consider your spend on training, people, systems, prop tech, and also your energy and focus resource.
One final point to consider…
Lettings books will trade at 1.4 times revenue, which is calculated using the average rent and management fee and then dividing that additional income by 12 (months). Based on the above example, your COA is £2,472 on a landlord that you have no relationship with and that hasn’t chosen you. If you compare that to how much you would spend on marketing to that landlord to try and convert them it’s pretty attractive, especially if it’s a management contract where you’ll start making that money back instantly.
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About the Authors
Simon Whale, Chief Kerfuffler & Founder
Simon has been a mainstay in the CRM space for agency for the last two decades. He was previously a Director at Reapit where he helped them become the market leading provider before selling the business in 2017. In that time Simon has built strong relationships with suppliers and agents which secures the very foundation of Kerfuffle’s philosophy – ‘bringing agents and suppliers together in a partnership that works for everyone’.
Richard Durrant, Commercial and Strategic Director
Richard Durrant has worked in estate agency for 24 years. Starting as an office junior in his mid-teens, Richard progressed up the ranks to Managing Director of a 12 branch estate agency, and also successfully set up and exited two smaller estate agency businesses. To complete his CV, Richard has also held Commercial Director roles in an online agency and a private equity firm.
What is Kerfuffle?
To put it simply, Kerfuffle helps estate agents discover new suppliers and we help suppliers discover new customers. We offer a simple search mechanism, detailed supplier profiles, authentic user reviews, and best in market deals to help kick-start great partnerships.
About TDS
Tenancy Deposit Scheme (TDS) is the only not-for-profit, Government-approved scheme for the protection of tenancy deposits. TDS provides impartial adjudication for any disputes that may arise over the tenancy deposits that we protect.
Join TDS Custodial: Where TDS hold the deposit for the duration of the tenancy. Agents, you can protect your deposits for FREE today here.
Or you can request a personalised demo of the database to discuss how TDS Custodial could streamline your deposit protection process here.
TDS can only comment on the process for our scheme, other deposit protection schemes may have a different process/require different steps. Content is correct at the time of writing.
These views are those of the author alone and do not necessarily reflect the view of TDS, its officers and employees.
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